The Coronavirus pandemic continues to claim more lives globally and creating financial and economic victims too. Businesses are suspended, events are put on hold and postponed.
The falling oil prices amid the coronavirus pandemic is predicting a recession in Nigeria that could lead to a devaluation of the naira.
The exchange rate has increased by more than 40 percent in the last few weeks. The operating budget for the year 2020 has already been reduced.
It is no doubt that the current crisis caused by the drop in oil prices could lead to other consequences including a recession and a devaluation of the Naira, the national currency. Some companies have started reducing the number of staff.
Why Nigeria might go into recession?
First, Africa’s top oil producer remains heavily dependent on oil, with crude accounting for 90% of foreign currency earnings and nearly 70% of the government’s income.
Low oil prices and falling output in 2016 underwrote Nigeria’s economic recession in 2016.
Prices remain low at sub-$60. The recent bombing in Saudi Arabia showed that prices can be disrupted for only short periods with oil producers, with markets ready to respond to shocks (and consequently keep prices low).
With production costs around $25 to $35 per barrel in Nigeria and Brent crude offtake prices ranging from $50 to $65 per barrel in the country, many producers will barely make profit, particularly in scenarios where overhead is high and debt payments weigh down cash flows (all of which is par for the course in Nigeria).
Nigeria is also confronting ageing oilfields and lack of new investments.
An uptick in exploration projects does not necessarily spell a boost for output considering the typical timeframe from exploration and development to production.
A new exploration sadly may not hit the market until late 2022 or in 2023. Security will also remain an issue in the Delta and beyond. Terrorism sadly continues to disrupt production in the country and raises the cost per barrel for any producer.